Bitcoin and tulips: right bulb moment

Bravo, Jamie Dimon. The JPMorgan chief executive who in 2012 demurred from fining his “London Whale” trader until losses passed $6bn has said any employee stupid enough to trade bitcoin would be out of the door. He also declared enthusiasm for the cryptocurrency is worse than Dutch Tulipmania in the 1600s — the original financial bubble to which all others are compared.

To the casual observer, the tulip label is a good enough red flag to wave over the excesses of bitcoin and its imitators. Mr Dimon’s attack was also better copy than a tepid warning from the UK’s Financial Conduct Authority the same day, advising consumers to “fully research” any project involving cryptocurrency.

Yet students of what Walter Bagehot called the “sentient nincompoops” who propel financial bubbles might strive for a better comparison.

First, the similarities. Like the technologists drawn to the elegance of bitcoin after its 2008 invention, bulb trading in the early 1630s was initially confined to aficionados. Financial innovation then made it easy for novices to trade bulbs. For the “colleges” — social gatherings in pubs across Holland where trading became popular — see online forums today.

Ahead of the peak of Tulipmania in early 1637, Amsterdam suffered a two-year plague and lost a fifth of its population. That put the risks of a little speculation in context. In the same way, recent financial crises might lead some to think: why not?

The character of bitcoin suggests a more 20th century phenomenon, however: the Ponzi scheme, where early investors are paid with money from new recruits. Claims for Bitcoin’s value are self-referential and contain a contradiction: it cannot be a speculative investment prone to quintupling and simultaneously a useful currency for making or receiving payments.

If it cannot be both, it must be neither. Bitcoin’s price is supported only by the recruitment of new enthusiasts to use or hoard it. Tulipmania at least left their owners with flowers to enjoy. Cryptocurrency buyers simply get a chance to relearn the lessons of history.

The Lex team is interested in hearing more from readers. Is bitcoin just the latest in a long series of speculative bubbles. Please tell us what you think in the comments section below.

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